The ContiGroup Pension Plan: A Complex Program Delivers Uncommon Benefits

The ContiGroup pension plan. You know it's out there, but probably have little idea of how it works. In fact, if you're still a ways from retirement, you've probably not given it a second thought.

Safeguarding Your Investments In the wake of Enron, retirement plans are receiving more attention than ever before.

Nevertheless, this plan, with assets of $250 million and annual payouts of about $15 million, is worth a few minutes of your time.

Now in its 51st year, the plan has achieved strong, often exceptional returns, and provided significant retirement income to three generations of CGC employees.

Bill Cafarella, Vice President of Compensation and Investments, notes that the pension plan is part of a broadbased retirement program, and is complemented by the CGC Employees' Savings Plan. With the latter, Bill notes, employees get portable accounts and access to a wide range of possible investments. At the same time, they must take responsibility for making their own investment decisions.

The pension plan is of course very different. ContiGroup manages the fund's assets and pays retirees a specific amount (either a regular monthly payment or a lump sum) based on years of service and average salary during the five highest paid consecutive years of employment. The company is also responsible for making up any shortfalls in the event that plan assets are insufficient to meet payment obligations.

This type of traditional "defined benefit" plan has become less common in the United States, in part because it's subject to complex regulations and is difficult to set up and administer. Currently, only about 20% of U.S. workers are covered by such a plan, down from about 40% in the mid 1970's, with most working at larger, more established companies.

"Companies starting out today probably would not develop this kind of plan," says Bill, "but in our case, it makes sense to continue. It's an appropriate plan for our population and provides an important benefit to our employees."

Not surprisingly, managing the plan is a complex process. On the one hand, the company must maintain a reliable estimate of the fund's liabilities, that is, the present value of future obligations to employees (currently about $170 million). This estimate is developed with the help of actuaries from the plan's consulting firm, Towers Perrin, who look at changes in CGC demographics (the age of our workforce, years of service, salary levels, etc.) as well as at current interest rates.

When these rates are high, the value of the plan's obligations, measured in today's dollars, goes down and liabilities decrease. When rates are low, the value of these obligations rises--a fact that has placed considerable pressure on many pension funds over the last two years.

In addition to calculating and monitoring liabilities, CGC must manage its $250 million portfolio. The first step in this process is asset allocation, determining how much the fund should place in various asset categories to minimize risk and still achieve its required return. This work, carried out with the help of Cambridge Associates, a pension consulting firm, has in recent years resulted in an allocation of approximately 65% stocks and 35% fixed income and other investments.

On the equity side, the plan takes a relatively conservative "value-based" approach, favoring established stocks that are undervalued by the market. "We've stayed away from riskier investments, including technology stocks, and have avoided playing the momentum game," says Bill, who concedes that this strategy did not produce the highest returns during the boom of the late 90's. On the other hand, it has allowed the fund to perform well in today's market and to earn above average returns over time. Over the last decade, the plan has returned more than 10% a year. Similarly, in the 12 months ended March 31, it returned 9.8% and ranked as one of the top pension funds at Northern Trust, the plan's trustee.

Within this overall framework, Bill and his colleagues on the ContiGroup investment committee (Richard Anderson, Teri McCaslin, and Michael Zimmerman) select the financial managers who, in turn, have responsibility for investing a designated portion of plan assets.

These managers follow specific investment strategies (for example, by specializing in large or small cap stocks) and, in each case, must limit the amount they invest in a particular industry or individual stock. They are also closely monitored by the investment committee and replaced when their performance doesn't measure up. This use of different fund managers provides an added level of diversification and thus helps to further minimize risk.

The CGC plan also benefits from a strongly overfunded position: an $80 million surplus of assets over liabilities. This surplus allows ContiGroup to cover its pension obligations with existing assets and without making additional contributions to the fund. As a result, the plan can more easily weather periods of below average returns, and can better adapt when lower interest rates lead to an increase in pension liabilities.

Overall, the plan has produced impressive results over time and has had a significant effect both on the company's finances and on the retirement income of employees. "This plan is more complex and less familiar than the 401(k), and people may not appreciate it as much," says Bill, "but it does have a major impact. It's rewarding to be involved with a program that's been successful over the years in terms of its performance, its contribution to the company, and its ability to provide a high level of income and security to employees."

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